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Do I Need an Operating Agreement for an LLC?

What’s the best part of starting a shiny new business ๐ŸŽ‰? It might be commissioning a cool new logo, holding your first business card, or making your very first sale ๐Ÿ˜Ž. Whatever the case, it’s probably not developing an operating agreement! So it’s understandable that many soon-to-be business owners ask, “Why do I need an operating agreement for an LLC? Can I just skip that?”

Nope! Although it may not be thrilling, in most cases, creating a formal operating agreement for your LLC business structure is a legal requirement ๐Ÿ‘Š. Although some people think that itโ€™s only multi-member LLCs that need this formal agreement template, even single-member LLCs should have one. Read on for the reasons why a custom operating agreement can form the backbone of your new LLC ๐Ÿ’ช.

What Is an Operating Agreement? 

An operating agreement is a special legal document put forward by the constituent members of an LLC. This document states how the members will run the LLC, make capital contributions, and develop a proper working relationship๐Ÿค. In a typical LLC, this kind of agreement seeks to outline how every activity gets carried out in the best interests of the LLC business owners.

The members (also known as owners) take part in the formation of the operating agreement for their company ๐Ÿ˜‡. An operating agreement has the same functions as corporate by-laws since it has some enforcement factors. 

Normally, an operating agreement is common in LLCs with two or more owners. However, thereโ€™s also a need for a single-member LLC operating agreement ๐Ÿ˜. You can read more about that in our recent article about sole proprietorship LLC operating agreements.

Do I Need an Operating Agreement for an LLC? 4 Reasons to Make One

Now to the main question of this article: “Do I need an operating agreement for an LLC?” Absolutely! Whether youโ€™re starting a multi-member LLC or a sole owner LLC, this is why this kind of agreement is one of the key documents of LLC formation ๐Ÿ“‹. 

1. Distinguish the Business from the Owner

When starting a business (LLC), you need to clearly show that it isnโ€™t connected to your personal assets ๐Ÿ˜‹. Developing an operating agreement is one way to accomplish this. Having an operating agreement in place helps to clarify that your LLC stands as a separate business entity.

In the accounting and record-keeping information for your LLC operation, be sure to state that the business has separate liability and tax demands. This offers personal asset protection if your LLC experiences legal issues. 

2. Give a Complete Description of Your LLC

Do you know that someone can define everything about your business entity by just checking out your operating agreement? An operating agreement represents a complete document that describes:

  • Your business affairs
  • Your business formation process (a business arrangement)
  • The operating rules and procedures used during normal business transactions๐Ÿ’ธ
  • How you contribute funds for your business endeavor and share business profits

As you can see, the agreement keeps records of every aspect of your company’s business formalities. You can even use it as a reference from time to time with your business partners should disputes arise.

3. Create a Succession Plan

An operating agreement creates a succession plan for your LLC.  Think of it as a business will that describes the succession procedure for your limited liability company. The operating agreement states what will happen if the owner dies or becomes incapacitated and can’t oversee the business operations. Specifically, the contents of operating agreements outline who to manage your business in either of these situations.

A proper succession plan for your LLC also minimizes family conflicts that could arise regarding property inheritance ๐Ÿ˜Ž.

4. Avoid Default State Rules

Though state rules can be useful at times, few entrepreneurs want to leave their business rules up to the state. Therefore, if you want your LLC to stand as an independent entity from state default rules๐Ÿ–Š, you need a functional operating agreement.

Expansive default rules become too general at times due to their default requirements. This agreement for your LLC helps you dictate๐Ÿ—ฃ every activity in your company without relying on default provisions. From a financial plan to voting procedures, from basic rules to the protocol for major decisions, your operating agreement can cover it all. 

Things to Include in an Operating Agreement 

Now that you know the importance of this agreement in your LLC ๐Ÿ‘‚, donโ€™t forget to include these key elements in the document:

  • Ownership information
  • Management processes
  • Member distributions and contributions
  • General rules and guidelines
  • Voting rights๐Ÿ‘€ and voting powers
  • Procedure for dissolution
  • Signatures for the owners

Do I Need an Operating Agreement for an LLC? Yes!

If you encounter challenges developing an operating agreement for your LLC, we can offer some assistance๐Ÿ‘Š. Purchase our LLC operating agreement legal template for our help crafting the perfect LLC operating agreement for your business.

Alternatively, you can reach out to our team for further help๐Ÿ’ช. We’ll answer all queries about creating an operating agreement and other necessary legal documents for your LLC ๐Ÿค—. Get started today to bring your business dreams to life!